Packaged meat producer, The Hillshire Brands Company announced on Monday that it has agreed to buy branded foods company Pinnacle Foods Inc. (PF - Analyst Report) in a cash and stock deal valued at approximately $6.6 billion, including debt. Following the announcement, Pinnacle Foods’ share price rose 13.2%, while Hillshire’s shares fell 3.2%.
Per the deal, Pinnacle Foods shareholders will get $18.00 in cash and 0.50 shares of Hillshire Brands common stock for each share. The deal values Pinnacle Foods at $36.02 a share, representing an implied premium of 18% of Pinnacle’s closing price on May 9. Once the deal closes, Pinnacle Foods shareholders will own around 33% of the combined company.
The deal will expand Hillshire Brands’ product offering and bolster its presence across the frozen, refrigerated and dry grocery categories.
Both the companies have complementary businesses. The deal will add Pinnacle Foods’ brands like Birds Eye frozen vegetables, Wish-Bone salad dressing, Vlasic pickles, Duncan Hines cake mixes and Log Cabin syrups to Hillshire Brand’ meat dominated brand portfolio comprising Hillshire Farm lunch meats Jimmy Dean sausages and Ball Park hot dogs. “Meats go with vegetables, sandwiches go with pickles,” Sean Connolly, CEO of Hillshire, told analysts on Monday validating the deal.
In a similar deal, another branded food and meat producer Hormel Foods Corp. (HRL - Analyst Report) bought Unilever plc’s (UL - Analyst Report) Skippy peanut butter business in Jan 2013 to reduce its dependency on meat.
The combined company’s enhanced scale, reach and capabilities will result in significant cost synergies, thereby accelerating margins. The deal will be immediately accretive to earnings and is expected to deliver $140 million in cost synergies by the third year through supply chain savings and lower overhead costs. Moreover, according to management the deal will result in “input cost diversification” — offset rising prices of meat and pork as the dependency on meat products goes down. Costs of meat and beef have risen sharply in the last one year.
The deal has been approved by the board of directors of both the companies. Moreover, private equity group, Blackstone — Pinnacle Foods’ largest shareholder owing 51% of the company — has agreed to vote in favor of the transaction. The post-merger company will be run by present CEO Connolly. The deal, subject to shareholder and regulatory approvals, is expected to close in September this year.
Hillshire Brands plans to fund the transaction with $2.1 billion of equity and by raising $4.8 billion of debt. The company expects to maintain its annual dividend of 70 cents a share but will suspend its share repurchase program to focus on debt pay-down.
While Hillshire Brands carries a Zacks Rank #3 (Hold), Pinnacle Foods has a Zacks Rank #2 (Buy).